Disruptive trends in the banking sector | Is technology the answer?

Report from the Equant Analytics and Theano Advisors Seminar, 26th October 2016

If we know anything at all at the moment, it is that we live in an uncertain world. Banks are no different to the rest of us and some of the challenges they face are little short of existential. Low interest rates and high liquidity levels push the search for yield out of traditional areas of banking while Brexit, the slowdown in Asia and the increase in regulations and compliance concerns raise issues of what a bank actually is: is it a utility;? Is it a liquidity provider? Is it a platform of complex legal, client and third party and correspondent relationships? Is it a payment system, in the words of one participant, “the paypal solution”?

Most importantly of all, is technology, specifically digitization and Fintech, a disruptor or an enabler to the sector?

Nowhere are these complexities more felt than in trade finance and this seminar was a wake-up call to C-Suite executives about the challenges that banks generally and trade finance in particular face. Every board-room executive would be aware of these challenges, but how many are aware that their trade finance function is a microcosm of all of these disruptive forces? Unlike other areas of banking, it is disproportionately affected by the decline in global trade growth and the risk and compliance constraints that mean that KYC and AML are increasingly the drivers of trade finance decisions rather than the commercial potential of the deal?

What was striking about the discussion was that the core risks were seen as compliance complexities but that technology was an enabler to managing these trends rather than a disruptor. The research presented at the event was clear that while Fintech offers many alternative ways of approaching specific security or client service issues that banks face, their lack of liquidity would always prevent them from providing a real challenge to the dominance of global and regional banks in the market.

However, the real challenge was seen from coming from the tech giants: Google, Amazon, Facebook, Apple, Microsoft, IBM and Alibaba – the GAFA-MIAs. The companies are highly liquid, have systems integrating platforms and payment services that mean that they are well-placed to compete with traditional banks. Microsoft is developing its own blockchain for trade finance product for example; while Amazon has a trade finance product aimed specifically at SMEs.

It is likely that the GAFA-MIA’s challenge will be as platform and payment providers and enablers of trade finance to smaller businesses. They are not regulated but can, instead, provide the facilities to de-risk the complexities of trade finance for smaller companies under a bank’s regulatory umbrella. Once they become regulated, they cease to be as nimble, and this would take away their competitive advantage.

For the senior executives in a bank, however, this represents a challenge for management. It is not necessary for a bank to build its own systems: Fintech companies likely to be enablers of tighter controls and systems within banks providing security and customer service around payment processing and client or legal relationships in different jurisdictions. Many banks work with Fintech companies in just this way. Similarly, there is potential to work with the GAFA-MIAs to reach the small business markets in riskier countries that banks are currently finding it hard to service because of compliance considerations.

This is a seismic cultural change to manage, however. If a bank has an existential crisis, so too will its employees and technology is notoriously difficult to implement if employees feel either displaced or disenfranchised by the change. Many processes in trade finance are naturally manual, letters of credit being a case in point. Banks face manifest challenges at the moment, but effective and strategic management of technology may turn both Fintech and the GAFA-MIAs into performance enablers, not disruptors.